How does inheritance work in the UK?
Writing a will
In the UK, we can choose what happens to our money, property and possessions after death by writing a will and testament – typically shortened to ‘will’.
A will is a legal document that identifies the individuals and organisations that will inherit your assets (which as a whole are your ‘estate’). Assets include:
- Property
- Savings
- Investments
- Vehicles
- Valuable belongings like jewellery and antiques
- Furniture and house contents
Remember that ‘negative assets’ such as debt and loans must pass to your inheritors too.
The will also outlines who is to organise the distribution of your estate on your behalf. Your will needs to be made in sound mind and formally witnessed and signed to be valid. Taking legal advice is recommended if your estate and its division is not straightforward.
Some assets also fall outside of your estate and are therefore not subject to Inheritance Tax, for example most types of Pension plans, life insurance (held in trust) and trusts generally.
Inheritance finance
Inheritance finance can be complicated.
Firstly, if your estate is valued at more than £325,000, anything above this amount will be taxed. UK inheritance tax is currently 40%, so it makes a significant dent in the assets that are passed on.
Valuing an estate can be complicated and can take several months. If your estate is valued at more than £325,000, you could benefit from inheritance tax advice from local financial advisors for guidance on reducing the tax on your assets and how to pass on your estate during your lifetime.
There are rules on giving money to family members, including tax-free thresholds (up to £3,000 per year) and post-receipt tax if the giver dies within seven years of gifting. Due to the complexity of the legalities around inheritance finance, professional guidance is advised.
Furthermore, there is also an additional threshold called the ‘residence nil-rate band’ (RNRB). This is available when eligible residential property is left to direct descendants and provides an extra tax-free allowance of up to £175,000 on top of the £325,000 nil-rate band. Taking both bands together means that you have a potential tax-free threshold of up to £500,000 – or up to £1 million as a married couple (including civil partners) – that you can leave to your child tax-free, however, IHT could be levied on the second death.
What happens if you don’t have a will?
When the deceased has no will, or the will is found to be invalid, the estate is divided according to the rules of intestacy.
The rules of intestacy
- Only married/civil partners and some close relatives can inherit
- Inheriting spouses/civil partners must be legally tied to you at the time of death
- Surviving children/grandchildren etc. will only inherit half of the estate after the first £322,000 has been deducted
- Anything in joint ownership will automatically go to the surviving owner
Partners not recognised by law cannot inherit, even if they have been with the deceased for decades. Any relations by marriage, close friends and carers are automatically excluded, although this can be contested in court.
If there are no surviving relatives who are eligible to inherit under the rules of intestacy, the estate passes to the Crown. This is a law known as bona vacantia. The Treasury Solicitor is then placed in charge of the estate to make the final decisions in terms of giving out grants and the division of goods.
